I’m sure a number of regular shizennougyou readers have heard about “The Latte Factor®,” the idea (trademarked by David Bach) that cutting back on a cup of gourmet coffee each day will result in wealth in the long term. My position on advice like this is it’s penny wise but often pound foolish. It’s the bigger things that count more. Walter Updegrave from Money Magazine holds a similar opinion.
Instead of obsessing over every little treat, try adopting a more realistic savings strategy. Start by acknowledging that funding retirement involves compromises. You are probably going to have to give up something today for a shot at a better tomorrow. But by going about it the right way, you can often find tradeoffs that will allow you to sock away real money while still leading a rich, full life.
In Bach’s example someone who cuts back on one coffee a day will save almost $1,000,000 after 40 years, assuming an unrealistic 10% return after fees and taxes. With a more realistic return, you’d be looking at much less, more likely around $400,000.
Rather than the small stuff, Updegrave believes it makes more sense to focus on the larger expense items throughout one’s life. Not only is Bach’s 10% return unrealistic, but the idea of reducing caffeine intake every day is a lot of work. A decision every day for the rest of your life is more difficult to manage than a few important decisions throughout a career. Here are Updegrave’s suggestions:
- Drive less expensive cars, save $180,000.
- Send your child to a public (not private) university, save $164,000.
- Cut your vacation spending by $1,000 a year, save $122,000.
Updegrave makes some assumptions as well, most notably:
- You drive expensive cars.
- You have a child and will pay for his or her education.
- You take vacations.
So obviously, this plan doesn’t work for everyone. But if it works for you, that’s more than $450,000 you’ll save before interest or returns. Invested, that will put you well ahead of Bach’s number — if all three suggestions are implemented and net the results Updegrave predicts.
Personally, I don’t even drink coffee. But maybe cutting back on the joe and saving the money instead works for you. it’s not a bad idea if you’re dedicated to the plan, and making the savings automatic will help, but after a while, I’ll bet many people are back to Starbucks despite the automatic savings.
Updated December 17, 2009 and originally published January 12, 2007.